The Q1 earnings report from Groupon Inc (NASDAQ:GRPN) was a big one for the company. GRPN stock traditionally has made big moves out of earnings, but Q1 seemed even more important than usual.
Groupon had made a number of changes heading into the quarter. The company exited 32 countries, cut headcount to lower SG&A spend, and ramped up marketing. Q1 represented the first clean look at the ‘new’ GRPN — and thus it was a key report for Groupon stock.
To be honest, the report wasn’t terrible. But it wasn’t good enough, either. A non-GAAP profit of a penny per share beat analyst expectations, but revenue missed. Execution sputtered, as GRPN faced disruptions in international markets and disappointing gross profit performance in North America.
The issue is more broad than that, however. Groupon still isn’t a profitable business. Trailing twelve month non-GAAP earnings-per-share is just $0.06. Adjusted EBITDA is guided to $200 to $240 million this year, but that excludes $80 to $90 million worth of Groupon stock issued to employees. The company still needs consistent growth to justify even the current $3+ price for GRPN stock. But the company simply isn’t driving that growth, and I’m skeptical that it will any time soon, if ever.
GRPN Stock: The Turnaround Plan
Since CEO Rich Williams took over in late 2015, the market has alternatively loved and loathed Groupon stock. The company’s earnings produce violent reactions: After the last four quarters, GRPN stock has:
- lost 13% (Q1);
- gained 23% (Q4);
- lost 22% (Q3);
- gained 29% (Q2).
The net effect on Groupon stock has been minimal, however. For all the volatility after earnings, the stock is up just 2.1% over the past twelve months.
The volatility makes some sense, as there are two opposing forces at work here. Williams’ efforts to turn around the business do make some sense. The international businesses weren’t working. Per the 10-K, GRPN exchanged its businesses in Russia, Indonesia, Malaysia and India — four reasonably attractive markets — for less than $20 million, total. Clearly, Groupon was throwing good money after bad in those markets, and others.
Domestically, marketing spend has been spiked to improve GRPN’s brand image, and get away from its perception as solely a “daily deal” provider. Card-linked offers have been rolled out in Chicago and other markets. Groupon is showing more flexibility with take rates to bring merchants back on the platform.
The moves all sense relative to where the company was in 2014-2015. But the problem for GRPN stock is that they may not necessarily work and Q1 earnings are not comforting relative to that concern.
Is Groupon a Viable Business?
The bear case against GRPN stock long has rested on the argument that Groupon’s business model simply isn’t sustainable. There really isn’t anything yet in the numbers to disprove that point.
In fact, coming out of Q1, the irony is that Groupon looks even more reliant on the daily deal business than ever. The international business saw gross profit decline 12% even in constant currency. Some of the country exits had an impact there, with management citing “disruption” from those efforts. But that aside, the quarter looks disappointing.
Goods billings fell 11% and gross profit increased just 1%. That business traditionally has been lower-margin, and it brings GRPN into more direct competition with Amazon.com, Inc. (NASDAQ:AMZN).
In Local, billings were up 9%. But gross profit increased only 3% year-over-year, which both Williams and CEO Mike Randolfi said on the Q1 call was below expectations. And the billings growth — along with a 1.5% sequential increase in active customers — has to be seen in the context of higher marketing spend. Groupon increased that spend 43% last year. And while the company is citing 12- to 18-month payback on that spend, it’s hard to see much impact in the billings numbers.
The argument against GRPN long has been that its daily deal business simply doesn’t work long-term. Businesses try it, are flooded with sub-optimal customers, and don’t return. That still roughly appears to be the case. Good businesses aren’t using Groupon. That’s a problem the company doesn’t appear to have fixed.
Stay Away From Groupon Stock
Without that problem being fixed, what’s really left to drive GRPN stock?
The company already has halved its salesforce, and cut total headcount another 4% in April. It’s ramping up promotional discounts (my app gets pinged pretty much every day for a percentage-off deal), which has hurt gross margins. New initiatives like cash-linked discounts (where users register a card and get cash back) are coming, but the company is adding another ~$16 million to Q2 marketing spend to back those new verticals. And the company’s success outside of daily deals has been limited (remember Groupon Now?).
The only way to have confidence in an investment in Groupon stock is to believe that there’s been a noticeable change in how the business is viewed by businesses and consumers. Management protestations to the contrary, I don’t see it. It’s still a daily deals provider; it’s still going to be used mostly by struggling businesses. There’s still the concern about the long-term liability problem relative to unredeemed Groupons for businesses that go bankrupt. And the business can’t turn a profit or generate positive cash flow without the massive dilutive issuance of GRPN stock options.
Williams has made changes, but those core problems haven’t changed. Until they do, the long-term trend of GRPN stock won’t change, either.
As of this writing, Vince Martin has no positions in any securities mentioned.